Home Builder Confidence Is Down And Permitting Appears To Reflect It

Builders pulled residential construction permits at a seasonally adjusted annual rate of 1,429,000 units in April. This was an 8.9 percent decline from the seasonally adjusted March rate of 1,569,000 and is down 28.1 percent from the revised April 2006 rate of 1,987,000 according to the monthly report on new residential construction released last week by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development. The April figure represents the slowest pace for permitting since June, 1997.

Housing starts, however, bumped up a bit to a seasonally adjusted annual rate of 1,528,000, 2.5 percent higher than the revised March figure of 1,491,000. Starts, however, were still 16.1 percent below the 1,821,000 pace of one year ago.

As is only logical with starts up and permitting down, the number of outstanding permits under which construction has not yet started dropped from 214,100 units to 200,900 units from March to April, a decrease of 6.1 percent and 14.7 percent lower than the 235,600 permits outstanding in April, 2006.

The President of the National Association of Home Builders (NAHB), California-based builder Brian Catalde remarked on the association's website that "Builders are adjusting to the adverse impacts of tighter lending standards on home sales and cancellations by cutting back on the number of new permits and working down their backlog of unused permits. NAHB's single-family Housing Market Index has been declining since February and builders are bracing for the challenges ahead."

NAHB's chief economist David Seiders said, "The pattern of building permits clearly shows that the dramatic downward correction in housing production still is underway. Home buyer demand has been sent into another down leg by the abrupt tightening of mortgage lending standards, and there is an increasingly heavy supply of vacant housing units on the market. Under these conditions, builders are cutting back on new construction and intensifying their efforts to bolster sales and limit cancellations."

The NAHB this week also released the results of its joint Home Builders/Wells Fargo Housing Market Index (HMI) for May. The HMI measures builders' perceptions about the housing market both current and short term. Respondents are asked to evaluate current single family sales and sales expectations over the next six months as good, fair, or poor and to rate prospective buyer traffic from very low to very high. Each of the three questions is scored individually and a composite score is calculated. Any number over 50 indicates that more builders view sales conditions as good rather than poor.

The HMI had been recovering from very low measures of builder confidence reached last fall but, the current composite score of 30 matches the lowest level in its current cycle which was achieved in September. The May figure was three points lower than the April figure.

All three of the component indexes declined. The index gauging current single-family sales registered 31, down two points; the index measuring sales expectations for the next six months fell three points to 41, and the index gauging traffic of prospective buyers was 23, four points lower than last month.

Economist Seiders stated, "The crisis in the subprime sector has infected other parts of the mortgage market as well as consumer psychology, and as a result the housing outlook has deteriorated. We're now projecting that home sales and housing production will not begin improving until late this year, and we're expecting the early stages of the subsequent recovery to be quite sluggish. There still are tremendous uncertainties regarding our baseline forecast going forward, owing largely to the subprime crisis that is having widespread effects throughout the mortgage market."

Three out of four regions posted declines in the May HMI. The Northeast was down 6 points to 32, while the South posted a 4 point decline to 33 and the West a 3 point decline to 32. The Midwest eked out a 1 point gain, to 23.